New York Court Rejects Effort To Hold LLC’s Members Liable For LLC’s Debt

New York Court Rejects Effort To Hold LLC’s Members Liable For LLC’s Debt

      In in this case, the trade creditors of a bankrupt LLC sought to hold the members thereof liable for the LLCs debts and obligations. Those efforts were rejected. Lynn v. Maida, 2019 N.Y. Slip Op. 02268, ___ N.Y. S.3d ___, 2019 WL 1338347 (App. Div. 1^st Dept. March 26, 2019).

      The LLC at issue was named 1+1 Management LLC. Being in bankruptcy, is was not a party to this action. The defendant were the members of the LLC, while the plaintiffs were certain trade creditors thereof.

      Certain unspecified claims based upon fraud against one of the LLC’s members were allowed to proceed on the basis that they had been, when combined with certain affidavits from plaintiffs, sufficiently pled. The resolution of those claims await further action.

      It appears that the plaintiffs’ alleged against the defendants a claim for conversion; exactly what is here being addressed is unclear.

      Most important, the plaintiffs alleged that they were owed fiduciary duty pursuant to the “trust fund doctrine.” The court rejected this claim. Assuming that the trust fund doctrine is applicable in the context of an LLC (rather than is traditional application in the law of corporations), it was held that, under New York law “a simple contract creditor may not invoke the doctrine to reach transferred assets before exhausting legal remedies by obtaining judgment on the debt and having execution returned unsatisfied.” 2019 WL 1338347, *2 (Citations omitted).

       The court as well rejected fiduciary duties based upon a “special relationships.” Rather, the relationship between the plaintiffs and the LLC were defined by contract, contracts that specified that neither was the “agent, co-venturer, or representative” of the other. The agreements as well contained merger/integration clauses. The court rejected the notion that the fact that the plaintiffs and defendants were friends created a fiduciary relationship.

Proving (or Not) the Existence of an Agreement to Arbitrate

Proving (or Not) the Existence of an Agreement to Arbitrate

      In the recent decision from the Federal District Court, it considered and ultimately rejected the defendant’s assertion that the plaintiff had agreed to arbitrate all disputes. That defendant was unable to prove a copy of the signed agreement to arbitrate and the testimony it solicited was internally inconsistent as to whether or not such an agreement would have been put in place. Tassy v. Lindsay Entertainment Enterprises, Inc., Civ. Act. No. 3:16-CV-00077-TBR, 2019 WL 1455797 (W.D. Ky. April 2, 2019).

      Tassy, on behalf of herself and others similarly situated, sought to bring a class action against Lindsay Entertainment Enterprises, Inc. on the basis of her misclassification as an independent contractor in contrast to being an employee. In response to the action, Lindsay asserted that Tassy was subject to an arbitration agreement. She denied that allegation, and the trial court conditionally certified the FLSA class. At a subsequent hearing, Lindsay proffered the testimony of three individuals to support that Tassy had entered into an agreement to arbitrate. The court framed the debate as follows:

At least regarding this threshold issue, the parties’ arguments are not complicated.  Tassy claims that she never signed an agreement containing an arbitration clause. On the other hand, Lindsay Entertainment Enterprises claims that she did.  Lindsay Entertainment Enterprises [a “gentleman’s club”] claims that pursuant to its standard practice, prior to working, all their dancers [of which Tassy was one] sign lease agreements that contain an arbitration clause. However, Lindsay Entertainment Enterprises is unable to produce such paperwork for Tassy because it was allegedly lost in a flood caused by a rusted-out water heater in the backroom where Tassy’s paperwork was stored. Lindsay Entertainment Enterprises claims further that, even if Tassy never signed the lease agreement containing the arbitration clause, Tassy accepted the terms of that lease agreement by acting in accordance with the agreement’s terms and continuing her employment.

2019 WL 1455797, *2 [bracket language added].

      The court noted as well that while there is a strong presumption in enforcing arbitration agreements, that presumption is not applicable in determining whether, in the first place, there exists an agreement to arbitrate. The court noted as well the rule that a contract is enforceable only if both parties agreed to be bound thereby.

      Parsing the testimony of those individuals called by Lindsay, the court noted a number of inconsistencies as to their testimony including when the alleged meetings took place, when in the hiring process the paperwork is completed and the failure to demonstrate that, at the time the alleged paperwork was completed, that it contained an agreement to arbitrate. The three persons called upon were not able to demonstrate that Lindsay had a standard business practice as to the completion of the paperwork and the hiring process. Ultimately:

The defendants were required to make a prima facia case for the existence of an arbitration agreement. For the reasons detailed above, they have not. ….  Ultimately, after weighing all the evidence, the Court finds that Lindsay Entertainment Enterprises has failed to make out a prima facia case for the existence of an arbitration agreement between itself and Tassy. Id., *5.

      The court would go on to reject the notion that by continuing to work, Tassy agreed to arbitrate any disputes. Rather, while in certain circumstances an unsigned arbitration agreement may be enforceable, the existence of various workplace rules and regulations “provide no indication that [Tassy] was ever made aware the one of those policies was an agreement to arbitrate.”

      The court concluded by addressing the decision rendered in Northern Kentucky Area Dev. Dist. v. Snyder and recently approved Kentucky Senate Bill 7, noting:

Finally, the Court takes due note of Tassy’s Notice of Supplemental Authority. The Court is aware of the Supreme Court of Kentucky’s recent holding in Northern Kentucky Area Dev. Dist. v. Snyder, No. 2017-SC-000277-DG. Tassy was correct—at the time—to bring such authority to the Court’s attention. However, since Northern Kentucky Area Dev. Dist. v. Snyder, Kentucky State Senate Bill 7, which amends KRS 336.700 and will apply both prospectively and retroactively, was signed into law on March 25, 2019. It effectively nullifies the Supreme Court’s holding in Northern Kentucky Area Dev. Dist. v. Snyder.

Id.

Who Is (And Is Not) The Client?

Who Is (And Is Not) The Client?

      This question was recently reviewed by the Sixth Circuit Court of Appeals, it considering the appeal of the jury verdict from Michigan. Having assessed the credibility of the witnesses, the jury found that certain business organizations affiliated with the plaintiffs were clients of the firm. Cohen v. Jaffe, Raitt, Heuer and Weiss, P.C., No. 18-1392, 1395, 2019 WL 1504393 (6th Cir. April 5, 2019).

      In this instance, Cohen et al. acquired distressed companies. A company under consideration, LSI Corporation, had multi-employer ERISA liability that Cohen was concerned could extend to other companies owned by Cohen and his group (“Control Group”). They contacted the Jaffe, Raitt firm to devise a structure that would somehow segregate LSI Corporation’s multi-employer ERISA liability. Specifically, Jaffe Raitt was advised that Cohen wanted to avoid personal liability or otherwise “put our other assets/companies at risk.” While Jaffe Raitt provided a proposed structure that would protect against that exposure, the proposed structure was ineffective, and upon its acquisition the multi-employer ERISA liability of LSI Corporation extended to the other companies owned by Cohen, including SL Assets, Inc.

      There was no written engagement letter specifying who was or was not the client of Jaffe Raitt. After a trial on the merits, the jury determined that SL Assets was a client of Jaffe Raitt notwithstanding the fact that Jaffe Raitt never came into actual knowledge of the existence of that company. Affirming the determination of the jury with respect to the attorney-client relationship, the Sixth Circuit wrote:

When there are two reasonable stories about the claimed attorney-client relationship and neither is blatantly contradicted by the record, a genuine dispute about the facts exists. As a result, the jury gets to decide – not the court. And here, the jury did.

      There are at least two lessons to be learned from this decision. First, it is important for attorneys to have written engagement letters specifying who is (and therefore by exclusion who is not) the client. Secondly, when the client emails about “our other assets/companies,’ it is incumbent upon the attorney to ask who they might be.

2019 Changes to Kentucky’s State Tax Laws

2019 Changes to Kentucky’s State Tax Laws

      My friend Erica Horn has published a review of the 2019 changes to the Kentucky tax code. HERE IS A LINK to those materials.

Bringing to an End the Three Hundred Thirty-Five Years’ War

Bringing to an End the Three Hundred Thirty-Five Years’ War

      Today marks the anniversary of the end of the Three Hundred Thirty-Five Years’ War, the final peace treaty having been signed on April 17, 1986. It will not be surprising if you are not familiar with this conflict. In fact, the belligerents in the action seem to be unaware that they were at war.

      The Three Hundred Thirty-Five Years’ War is/was alleged to existed between the Netherlands and the Isles of Scilly, which are off the southwest coast of England at the far western tip of Cornwall. The conflict arose at the end of the English Civil War the “Parliamentarians” being under the control of, amongst others, Oliver Cromwell, they being pitted against the Royalist. In the course of the war, the Royalist army and navy were forced into Cornwall. That fleet in turn was attacking the Dutch Merchant Navy. Ultimately, a representative of the Dutch Navy arrived in Scilly to demand reparations from the Royalist fleet. When the request for reparations was rejected, the representative of the Dutch Navy is alleged to have declared war on the Isles of Scilly. Not long thereafter, the Royalist fleet surrendered to the Parliamentarians and the Dutch Fleet left. However, nobody saw it necessary to address the alleged state of war between the Dutch Republic and the Isles.

      Finally, in 1986, it was realized that there was no formal peace treaty ending the war, even though apparently nobody was really aware that a state of war existed. A peace treaty was signed bringing the “conflict” to a resolution.

More on VanWinkle and the Waiver of a Member Limited Liability

More on VanWinkle and the Waiver of a Member Limited Liability

      Last August, based upon a wording of a particular operating agreement, the Kentucky Court of Appeals affirmed the trial court’s determination that the members had waived the limited liability that is otherwise enjoyed by members of an LLC. HERE IS A LINK to my prior posting on this decision.

      Since then I have written an expanded review of the case, and that article has been published in the March/April, 2019 issue of the Journal of Passthrough Entities. The article is titled VanWinkle v. Walker: Did the Members Intend to Waive Limited Liability?; HERE IS A LINK to the article.

      I hope you find it helpful.

IRS Updates Rules With Respect to FEIN Applications

IRS Updates Rules With Respect to FEIN Applications

      Various businesses, as well as other parties, need to apply for a Federal Employer Identification Number (“FEIN”). Recently, the IRS announced changes to some of the procedures. See IRS Revises EIN Application Process, Seeks to Enhance Security, IR-2019-58 (March 27, 2019).

      The application for an FEIN is made on Form SS-4. In this release, the IRS announced that, effective May 13, 2019, SS-4s must be submitted by natural persons.

      The SS-4 requires that there be designated a “responsible party” with respect to the business for which the FEIN is sought. The Form SS-4 must identify that responsible party and as well set forth their Social Security number or Individual Taxpayer Identification Number (“ITIN”). With this change, it will not be possible to, for example, identify the corporate parent of a wholly-owned subsidiary, along with its FEIN, as the responsible party.

      The responsible party identified on the SS-4 should be “the person who ultimately owns or controls the entity or exercises ultimate effective control over the entity. In cases where more than one person meets that definition, the entity may decide which individual should be the responsible party.”

     As set forth in the above-referenced press release, it is the position of the IRS that“The new requirement will provide greater security to the EIN process by requiring an individual to be the responsible party and to improve transparency.”

      The press release reiterated that changes in the responsible party may be made on Form 8822-B. There does not appear, however, to be a mechanism by which a Responsible Party may resign from that position.